UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21560
CNL INCOME FUND XI, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3078854
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No_X_
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 4,000,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund XI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 20, 1991. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on March 18, 1992, the
Partnership offered for sale up to $40,000,000 of limited partnership interests
(the "Units") (4,000,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 12, 1992. The offering terminated on September 28, 1992, at which date the
maximum offering proceeds of $40,000,000 had been received from investors who
were admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$35,200,000, and were used to acquire 39 Properties, including interests in four
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes.
As of December 31, 2000, the Partnership owned 34 Properties directly
and seven Properties indirectly through joint venture or tenancy in common
arrangements. During the year ended December 31, 2001, the Partnership sold its
Property in Sebring, Florida and the Property in Round Rock, Texas which was
held as tenants-in-common with an affiliate of the General Partners, and
reinvested the majority of these net sales proceeds in a Property in Houston,
Texas. During the year ended December 31, 2002, the Partnership sold its
Properties in Columbus, Ohio and East Detroit, Michigan, and reinvested the net
sales proceeds in two Properties located in Universal City and Schertz, Texas
with an affiliate of the General Partners and a Florida limited partnership, as
two separate tenancy in common arrangements. In addition, Ashland Joint Venture,
in which the Partnership has a 62.16% interest, sold its Property in Ashland,
New Hampshire and reinvested, the majority of the net sales proceeds in a
property in San Antonio, Texas. During 2003, the Partnership sold its Property
in Abilene, Texas and reinvested the proceeds in a Property in Hoover, Alabama
and a Property in Dalton, Georgia, each as a separate tenants-in-common, with
affiliates of the General Partners. As of December 31, 2003, the Partnership
owned 41 Properties. The 41 Properties included five Properties owned by joint
ventures in which the Partnership is a co-venturer and five Properties owned
with affiliates of the General Partners as tenants-in-common. In January,
February, and March 2004, the Partnership sold its Properties in Lynchburg,
Virginia; Cullman, Alabama; and Huntersville, North Carolina, respectively. The
Partnership expects to reinvest these proceeds in additional Properties or to
use the proceeds to pay liabilities of the Partnership. The Partnership leases
the Properties generally on a triple-net basis with the lessees responsible for
all repairs and maintenance, property taxes, insurance and utilities.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income taxes. Certain lessees also have
been granted options to purchase Properties, generally at the Property's then
fair market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property purchase options
granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership, the
joint ventures in which the Partnership is a co-venturer, and the properties
owned with affiliates of the General Partners as tenants-in-common provide for
initial terms ranging from 10 to 20 years (the average being 17 years) and
expire between 2006 and 2023. The leases are generally on a triple-net basis,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $45,600 to $218,100. The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in specified lease years (generally
the sixth lease year), the annual base rent required under the terms of the
lease will increase.
Generally, the leases of the Properties provide for two to five
successive five-year renewal options subject to the same terms and conditions as
the initial lease. Lessees of 26 of the Partnership's 41 Properties also have
been granted options to purchase Properties at the Property's then fair market
value after a specified portion of the lease term has elapsed. Fair market value
will be determined through an appraisal by an independent appraisal firm. Under
the terms of certain leases, the option purchase price may equal the
Partnership's original cost to purchase the Property (including acquisition
costs), plus a specified percentage from the date of the lease or a specified
percentage of the Partnership's purchase price, if that amount is greater than
the Property's fair market value at the time the purchase option is exercised.
The leases generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership first must offer the
lessee the right to purchase the Property on the same terms and conditions, and
for the same price, as any offer which the Partnership has received for the sale
of the Property.
In December 2003, the Partnership entered into a new lease with a new
tenant for the Property in Yelm, Washington. The former tenant of this Property
ceased restaurant operations and vacated the Property in March 2003. During
2003, the Partnership reinvested the proceeds from the sale of the Property in
Abilene, Texas in a Property in Hoover, Alabama and a Property in Dalton,
Georgia, each as a separate tenants-in-common, with affiliates of the General
Partners. The terms of the new leases are substantially the same as the
Partnership's other leases.
In 2004, the Partnership sold its Properties in Lynchburg, Virginia;
Cullman, Alabama; and Huntersville, North Carolina, each to a third party. The
Partnership intends to reinvest these proceeds in additional Properties or to
use the proceeds to pay liabilities of the Partnership.
Major Tenants
During 2003, four lessees (or groups of affiliated lessees) of the
Partnership and its consolidated joint ventures, (i) Jack in the Box Inc. and
Jack in the Box Eastern Division, L.P. (which are affiliated entities under
common control) (hereinafter referred to as "Jack in the Box Inc."), (ii) Golden
Corral Corporation, (iii) Denny's, Inc. and Denny's Corporation (which are
affiliated entities under common control) (hereinafter referred to as "Denny's
Corporation"), and (iv) Texas Taco Cabana, LP each contributed more than 10% of
total rental revenues (including total rental revenues from the Partnership's
consolidated joint ventures, and the Partnership's share of total rental
revenues from Properties owned by unconsolidated joint ventures and Properties
owned with affiliates of the General Partners as tenants-in-common). As of
December 31, 2003, Jack in the Box Inc. was the lessee under leases relating to
eight restaurants, Golden Corral Corporation was the lessee under leases
relating to three restaurants, Denny's Corporation was the lessee under leases
relating to six restaurants, and Texas Taco Cabana, LP was the lessee under
leases relating to four restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, these four lessees (or groups of
affiliated lessees) will each continue to contribute more than 10% of total
rental revenues in 2004. In addition, five Restaurant Chains, Jack in the Box,
Burger King, Golden Corral Buffet and Grill ("Golden Corral"), Denny's, and Taco
Cabana each accounted for more than 10% of total rental revenues during 2003
(including total rental revenues from the Partnership's consolidated joint
ventures, and the Partnership's share of total rental revenues from Properties
owned by unconsolidated joint ventures and Properties owned with affiliates of
the General Partners as tenants-in-common). In 2004, it is anticipated that Jack
in the Box, Burger King, Golden Corral, and Taco Cabana will each continue to
account for more than 10% of the total rental revenues to which the Partnership
is entitled under the terms of the leases. Any failure of these lessees or
Restaurant Chains will materially affect the Partnership's operating results if
the Partnership is not able to re-lease the Properties in a timely manner. No
single tenant or group of affiliated tenants lease Properties with an aggregate
carrying value in excess of 20% of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2003.
Entity Name Year Ownership Partners Property
CNL/Airport Joint Venture 1992 77.33 % Various third party partners Orlando, FL
Ashland Joint Venture 1992 62.16 % CNL Income Fund IX, Ltd. San Antonio, TX
CNL Income Fund X, Ltd.
Des Moines Real Estate 1992 76.60 % CNL Income Fund VII, Ltd. Des Moines, WA
Joint Venture CNL Income Fund XII, Ltd.
Denver Joint Venture 1992 85.00 % Various third party partners Denver, CO
CNL Income Fund XI, Ltd. and 1997 72.58% CNL Income Fund XVII, Ltd. Corpus Christi, TX
CNL Income Fund XVII
Ltd., Tenants in Common
Portsmouth Joint Venture 1999 42.80 % CNL Income Fund XVIII, Ltd. Portsmouth, VA
CNL Income Fund VI, Ltd. and 2002 85.80% CNL Income Fund VI, Ltd. Universal City, TX
CNL Income Fund XI,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd. and 2002 90.50% CNL Income Fund VI, Ltd. Schertz, TX
CNL Income Fund XI,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd., CNL 2003 38.00% CNL Income Fund VI, Ltd. Dalton, GA
Income Fund XI, Ltd., CNL Income Fund XV, Ltd.
CNL Income Fund XV, CNL Income Fund XVI, Ltd.
Ltd., and CNL Income
Fund XVI, Ltd., Tenants
in Common
CNL Income Fund XI, Ltd. and 2003 26.00% CNL Income Fund XVI, Ltd. Hoover, AL
CNL Income Fund XVI,
Ltd., Tenants in Common
Each joint venture or tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership has management control of CNL/Airport Joint Venture and Denver Joint
Venture, and shares management control equally with the affiliates of the
General Partners for the other joint ventures.
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
entity or the Property. The Partnership and its partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture or tenancy in common. Net cash flow from operations is distributed to
each joint venture or tenancy in common partner in accordance with its
respective percentage interest in the entity or the Property.
Ashland Joint Venture has an initial term of 30 years, and each of the
other joint ventures has an initial term of 20 years. After the expiration of
the initial term, all five continue in existence from year to year unless
terminated at the option of either joint venturer or by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partners to dissolve the
joint venture. Any liquidation proceeds, after paying joint venture debts and
liabilities and funding reserves for contingent liabilities, will be distributed
first to the joint venture partners with positive capital account balances in
proportion to such balances until such balances equal zero, and thereafter in
proportion to each joint venture partner's percentage interest.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partners, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
During 2003, the Partnership reinvested the proceeds from the sale of
the Property in Abilene, Texas in a Property in Hoover, Alabama and a Property
in Dalton, Georgia, each as a separate tenants-in-common, with affiliates of the
General Partners.
Certain Management Services
RAI Restaurants, Inc. (the "Advisor"), an affiliate of the General
Partners, provides certain services relating to management of the Partnership
and its Properties pursuant to a management agreement with the Partnership.
Under this agreement, the Advisor is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices, and providing
information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership had agreed to pay the Advisor an
annual fee of one percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer, but not in
excess of competitive fees for comparable services.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM perform certain services for the
Partnership. In addition, the General Partners have available to them the
resources and expertise of the officers and employees of CNL Financial Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 2003, the Partnership owned 41 Properties. Of the 41
Properties, 31 are owned by the Partnership in fee simple, five are owned
through joint venture arrangements and five are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement.
Description of Properties
Land. The Partnership's Property sites, owned either directly or
indirectly, range from approximately 16,300 to 329,100 square feet depending
upon building size and local demographic factors. Sites purchased by the
Partnership are in locations zoned for commercial use which have been reviewed
for traffic patterns and volume.
The following table lists the Properties owned by the Partnership,
either directly or indirectly, as of December 31, 2003 by state
State Number of Properties
Alabama 3
Arizona 1
California 1
Colorado 2
Connecticut 2
Florida 1
Georgia 1
Kansas 1
Louisiana 1
Massachusetts 1
Mississippi 1
New Mexico 2
North Carolina 2
Ohio 3
Oklahoma 2
South Carolina 2
Texas 11
Virginia 2
Washington 2
--------------
TOTAL PROPERTIES 41
==============
Buildings. Each of the Properties includes a building that is one of a
Restaurant Chain's approved designs. The buildings generally are rectangular and
are constructed from various combinations of stucco, steel, wood, brick and
tile. Building sizes range from approximately 2,100 to 11,400 square feet. All
buildings on Properties are freestanding and surrounded by paved parking areas.
Buildings are suitable for conversion to various uses, although modifications
may be required prior to use for other than restaurant operations. As of
December 31, 2003, the Partnership had committed to fund additional construction
costs to the Property in Hoover, Alabama, in which the Partnership owns a 26%
interest as tenants-in-common with CNL Income Fund XVI, Ltd. Depreciation
expense is computed for buildings and improvements using the straight line
method using depreciable lives of 40 years for federal income tax purposes.
As of December 31, 2003, the aggregate cost of the Properties owned by
the Partnership (including its consolidated joint ventures) and the
unconsolidated joint ventures (including Properties owned through tenancy in
common arrangements) for federal income tax purposes was $30,421,966 and
$9,271,598, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly, as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Black-eyed Pea 1
Burger King 9
Casa del Rio 1
Denny's 5
Flat Rock Grille 1
Golden Corral 3
Hardee's 4
Jack in the Box 8
KFC 1
O'Charley's 1
Sagebrush Restaurant 1
Taco Bell 1
Taco Cabana 4
Other 1
--------------
TOTAL PROPERTIES 41
==============
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the majority of the Properties to
operators of Restaurant Chains. The leases are generally on a long-term "triple
net" basis, meaning that the tenant is responsible for repairs, maintenance,
property taxes, utilities and insurance.
The following is a schedule of the average rent per Property and
occupancy rates for the years ended December 31:
2003 2002 2001 2000 1999
-------------- ------------- ------------- -------------- -------------
Rental Revenues (1) $ 3,986,790 $ 4,333,193 $ 3,747,614 $ 3,914,520 $ 4,087,385
Properties 41 40 40 41 41
Average Rent per Property $ 97,239 $ 108,329 $ 93,690 $ 95,476 $ 99,692
Occupancy rate 100% 100% 100% 100% 100%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
The following is a schedule of lease expirations for leases in place as
of December 31, 2003 for the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2004 -- $ -- --
2005 -- -- --
2006 4 360,538 10.01%
2007 3 498,758 13.84%
2008 -- -- --
2009 -- -- --
2010 9 845,071 23.46%
2011 2 95,355 2.65%
2012 11 1,088,506 30.21%
2013 -- -- --
Thereafter 8 714,488 19.83%
---------- -------------------- -------------
Total (1) 37 $ 3,602,716 100.00%
========== ==================== =============
(1) Excludes one Property under construction at December 31, 2003 and
three Properties sold in 2004.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2003 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Jack in the Box Inc. leases eight Jack in the Box restaurants, each
with an initial term of 18 years (expiring in 2010) and the average minimum base
annual rent of approximately $96,300 (ranging from approximately $70,000 to
$113,800).
Burger King Corporation leases four Burger King restaurants, each with
an initial term of 14 years (expiring in 2006) and average minimum base annual
rent of approximately $90,100 (ranging from approximately $78,800 to $110,300).
Golden Corral Corporation leases three Golden Corral restaurants, each
with an initial term of 15 years (expiring in 2007) and average minimum base
annual rent of approximately $166,300 (ranging from approximately $157,300 to
$172,400).
Denny's Corporation leases three Denny's restaurants and three other
restaurants, with an initial terms ranging from 14 to 20 years (expiring in
2012) and average minimum base annual rent of approximately $90,300 (ranging
from approximately $75,000 to $129,200).
Texas Taco Cabana, LP leases four Taco Cabana restaurants, each with an
initial term of 19 years (expiring in 2020) and average minimum base annual rent
of approximately $121,000 (ranging from approximately $107,000 to $138,100).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of
the Partnership, nor any of their respective Properties, is party to, or subject
to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 12, 2004, there were 3,170 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. During 2003, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase) may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfers of Units. From
inception through December 31, 2003, the price paid for any Unit transferred
pursuant to the Plan was $9.50 per Unit. The price paid for any Unit transferred
other than pursuant to the Plan was subject to negotiation by the purchaser and
the selling Limited Partner. The Partnership will not redeem or repurchase
Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2003 and 2002, other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
---------------------------------- -----------------------------------
High Low Average High Low Average
--------- -------- ---------- --------- --------- ----------
First Quarter $10.00 $ 5.70 $ 8.01 $9.51 $ 6.61 $ 7.81
Second Quarter 10.00 8.07 9.37 9.50 7.00 8.66
Third Quarter 8.70 6.25 7.86 9.50 6.35 7.63
Fourth Quarter 9.50 7.32 8.89 9.50 6.61 8.16
(1) A total of 27,328 and 52,106 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2003 and 2002,
respectively.
The capital contribution per Unit was $10. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the partnership agreement.
For the years ended December 31, 2003 and 2002, the Partnership
declared cash distributions of $3,500,024 and $3,700,024, respectively, to the
Limited Partners. During the quarter ended December 31, 2002, the Partnership
declared a special distribution to the Limited Partners of $200,000 which
represented cumulative excess operating reserves. This special distribution was
effectively a return of a portion of the limited partners' investment, although
in accordance with the partnership agreement, $200,000 was applied toward the
limited partners' 10% Preferred Return. No amounts distributed to partners for
the years ended December 31, 2003 and 2002 are required to be or have been
treated by the Partnership as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. No
distributions have been made to the General Partners to date. As indicated in
the chart below, these distributions were declared at the close of each of the
Partnership's calendar quarters. These amounts include monthly distributions
made in arrears for the Limited Partners electing to receive such distributions
on this basis.
Quarter Ended 2003 2002
--------------------- ------------- ----------------
March 31 $ 875,006 $ 875,006
June 30 875,006 875,006
September 30 875,006 875,006
December 31 875,006 1,075,006
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
(b) Not applicable.
Item 6. Selected Financial Data
Year ended December 31: 2003 2002 2001 2000 1999
------------- -------------- ------------- -------------- -------------
Continuing Operations (4):
Revenues $ 3,059,582 $ 3,272,602 $ 3,121,864 $ 3,266,620 $ 3,294,517
Equity in earnings (loss) of
unconsolidated joint
ventures 437,801 863,810 (147,538 ) 256,056 259,676
Income from continuing
operations (1) 2,589,395 3,247,574 1,617,158 2,658,105 2,620,710
Discontinued Operations (4):
Revenues 285,384 636,583 438,983 469,476 550,136
Income from and gain on
disposal of discontinued
operations (2) 611,054 1,066,552 110,158 436,358 521,064
Net income 3,200,449 4,314,126 1,727,316 3,094,463 3,141,774
Income per unit:
Continuing operations $ 0.65 $ 0.81 $ 0.40 $ 0.66 $ 0.66
Discontinued operations 0.15 0.27 0.03 0.11 0.13
------------- -------------- ------------- -------------- -------------
$ 0.80 $ 1.08 $ 0.43 $ 0.77 $ 0.79
============= ============== ============= ============== =============
Cash distributions
declared (3) $ 3,500,024 $ 3,700,024 $ 3,500,024 $ 3,500,024 $ 3,500,024
Cash distributions
declared per unit (3) 0.88 0.93 0.88 0.88 0.88
At December 31:
Total assets $ 33,842,059 $34,320,216 $33,451,728 $35,227,373 $35,792,092
Partners' capital 32,235,620 32,535,195 31,921,093 33,693,801 34,099,362
(1) Income from continuing operations for the year ended December 31, 2001,
includes approximately $8,600 from gains on sale of assets. Income from
continuing operations for the years ended December 31, 2003, 2001, and
2000 includes approximately $67,700, $407,400, and $34,500,
respectively, for provisions for write-down of assets.
(2) Income from and gain on disposal of discontinued operations for the
years ended December 31, 2003 and 2002 includes gains on sale of
discontinued operations of approximately $378,000 and $442,100,
respectively. Income from and gain on disposal of discontinued
operations for the years ended December 31, 2003, 2001, and 2000
includes approximately $41,200, $247,000, and $26,000, respectively,
for provisions for write-down of assets.
(3) Distributions for the year ended December 31, 2002 include a special
distribution to the Limited Partners of $200,000, which represented
cumulative excess operating reserves.
(4) Certain items in the prior years' financial data have been reclassified
to conform to the 2003 presentation. This reclassification had no
effect on net income. The results of operations relating to Properties
that were identified for sale as of December 31, 2001 but sold
subsequently are reported as continuing operations. The results of
operations relating to Properties that were either identified for sale
and disposed of subsequent to January 1, 2002 or were classified as
held for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on August 20, 1991, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
Restaurant Chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases provide for minimum base annual rental amounts (payable in
monthly installments) ranging from approximately $45,600 to $218,100. The
majority of the leases provide for percentage rent, based on sales in excess of
a specified amount. In addition, some of the leases provide that, commencing in
specified lease years (generally the sixth lease year), the annual base rent
required under the terms of the lease will increase.
As of December 31, 2001, the Partnership owned 34 Properties directly
and six Properties indirectly through joint venture or tenancy in common
arrangements. As of December 31, 2002, the Partnership owned 32 Properties
directly and eight Properties indirectly through joint venture or tenancy in
common arrangements. As of December 31, 2003, the Partnership owned 31
Properties directly and ten Properties indirectly through joint venture or
tenancy in common arrangements.
Capital Resources
Cash from operating activities was $3,788,332, $4,229,236, and
$3,267,699, for the years ended December 31, 2003, 2002, and 2001, respectively.
The decrease in cash from operating activities during 2003, as compared to 2002,
and the increase in cash from operating activities during 2002, as compared to
2001, resulted from changes in the Partnership's working capital, such as the
timing of transactions relating to the collection of receivables and the payment
of expenses, and changes in income and expenses, such as changes in rental
revenues and changes in operating and Property related expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
During 2001, the Partnership and CNL Income Fund VI, Ltd., a Florida
limited partnership and affiliate of the General Partners, as tenants-in-common,
sold the Property in Round Rock, Texas and received net sales proceeds of
approximately $1,510,700, resulting in a gain on sale of assets, to the
tenancy-in-common, of approximately $123,900. The Partnership owned a 23%
interest in this Property and received approximately $345,000 as a liquidating
distribution representing its pro-rata share of the net sales proceeds. In
addition, during 2001, the Partnership sold its Property in Sebring, Florida to
the tenant and received net sales proceeds of approximately $1,029,000,
resulting in a gain on sale of assets of approximately $8,600. During 2001, the
Partnership reinvested approximately $1,376,800 of these net sales proceeds and
the liquidation proceeds received from the sale of the Property in Round Rock,
Texas, in a Property in Houston, Texas.
During 2002, the Partnership sold its Properties in Columbus, Ohio and
East Detroit, Michigan, to the tenant and received net sales proceeds of
approximately $1,734,400, resulting in a gain on disposal of discontinued
operations of approximately $442,100. During 2002, the Partnership reinvested
the majority of these net sales proceeds in a Property in Universal City, Texas
and one in Schertz, Texas, each as a separate tenants-in-common arrangement with
CNL Income Fund VI, Ltd. The Partnership and CNL Income Fund VI, Ltd. entered
into agreements whereby each co-tenant will share in the profits and losses of
each Property in proportion to its applicable percentage interest. The
Partnership contributed approximately $897,200 and $942,500 for an 85.8% and a
90.5% interest, respectively, in these Properties. In addition, during 2002,
Ashland Joint Venture, in which the Partnership owns a 62.16% interest, sold its
Property in Ashland, New Hampshire to the tenant and received net sales proceeds
of approximately $1,472,900, resulting in a gain on disposal of discontinued
operations of approximately $500,900. During 2002, the joint venture reinvested
the majority of these net sales proceeds in a Property in San Antonio, Texas.
The acquisitions of the Properties in Houston, Universal City, Schertz,
and San Antonio, Texas, from CNL Funding 2001-A, LP, a Delaware limited
partnership and an affiliate of the General Partners. CNL Funding 2001-A, LP had
purchased and temporarily held title to the Properties in order to facilitate
the acquisition of the Properties by the Partnership. The purchase prices paid
by the Partnership represented the costs incurred by CNL Funding 2001-A, LP to
acquire the Properties.
In August 2002, the Partnership received a parcel of land adjacent to
its Property in Roswell, New Mexico from the tenant of this Property in payment
for approximately $32,500 of rental revenues owed. The parcel of land is
developed as a parking lot which is contiguous to the parking lot of the
Partnership's Property. The Partnership accounted for this transaction as a
non-monetary exchange of assets at their fair value. No gain or loss was
recognized on this transaction.
During 2003, the Partnership sold its Property in Abilene, Texas to the
tenant and received net sales proceeds of approximately $931,900, resulting in a
gain on disposal of discontinued operations of approximately $378,000. The
Partnership reinvested the majority of these proceeds in a Property in Dalton,
Georgia with CNL Income Fund VI, Ltd., CNL Income Fund XV, Ltd., and CNL Income
Fund XVI, Ltd., and in a Property in Hoover, Alabama with CNL Income Fund XVI,
Ltd., each as tenants-in-common. The Partnership contributed approximately
$722,000 and $325,700 to the Properties in Dalton, Georgia and Hoover, Alabama,
respectively, and has committed to fund up to an additional $246,300 for
additional construction costs relating to the Property in Hoover, Alabama. The
Partnership owns a 38% and a 26% interest in the Properties in Dalton, Georgia
and Hoover, Alabama, respectively. Each of the CNL Income Funds is a Florida
limited partnership and an affiliate of the General Partners.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership. The General Partners further have represented that
they will use their reasonable efforts to structure any borrowing so that it
will not constitute "acquisition indebtedness" for federal income tax purposes
and also will limit the Partnership's outstanding indebtedness to three percent
of the aggregate adjusted tax basis of its Properties. Affiliates of the General
Partners from time to time incur certain operating expenses on behalf of the
Partnership for which the Partnership reimburses the affiliates without
interest.
At December 31, 2003, the Partnership had $1,669,350 in cash and cash
equivalents, as compared to $1,763,878 at December 31, 2002. At December 31,
2003, these funds were held in demand deposit accounts at commercial banks,
money market accounts and certificates of deposit with less than a 90-day
maturity date. The decrease in cash and cash equivalents at December 31, 2003,
as compared to December 31, 2002, was a result of the Partnership paying to the
Limited Partners, the special distribution of cumulative excess operating
reserves that was accrued for as of December 31, 2002. As of December 31, 2003,
the average interest rate earned on the rental income deposited in demand
deposit accounts at commercial banks, money market accounts and certificates of
deposit with less than a 90-day maturity date, was less than one percent
annually. The funds remaining at December 31, 2003, after the payment of
distributions and other liabilities will be used to fund additional construction
costs and to meet the Partnership's working capital needs.
In 2004, the Partnership sold its Properties in Lynchburg, Virginia;
Cullman, Alabama; and Huntersville, North Carolina, each to a third party and
received total net sales proceeds of approximately $3,041,180, resulting in a
total gain on disposal of discontinued operations of approximately $619,400. The
Partnership expects to either reinvest these proceeds in additional Properties
or use the proceeds to pay liabilities of the Partnership.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate net cash
flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all leases of the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based on cash from operations, and for the year ended December 31,
2002, cumulative excess operating reserves, the Partnership declared
distributions to the Limited Partners of $3,500,024, $3,700,024, and $3,500,024,
for the years ended December 31, 2003, 2002, and 2001, respectively. This
represents distributions of $0.88, $0.93, and $0.88 per Unit for the years ended
December 31, 2003, 2002, and 2001, respectively. During the quarter ended
December 31, 2002, the Partnership declared a special distribution to the
Limited Partners of $200,000, which represented cumulative excess operating
reserves. This special distribution was effectively a return of a portion of the
Limited Partners' investment, although in accordance with the partnership
agreement, the total amount was applied toward the limited partners' 10%
Preferred Return. No amounts distributed to the Limited Partners for the years
ended December 31, 2003, 2002, and 2001 are required to be or have been treated
by the Partnership as a return of capital for purposes of calculating the
Limited Partners' return on their adjusted capital contributions. The
Partnership intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.
During 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the years ended December 31, 2003, 2002, and 2001.
As of December 31, 2003 and 2002, the Partnership owed $16,161 and
$20,101, respectively, to affiliates for operating expenses, accounting and
administrative services, and management fees. As of March 12, 2004, the
Partnership had reimbursed the affiliates for these amounts. Other liabilities,
including distributions payable, were to $1,095,144 at December 31, 2003, as
compared to $1,256,929 at December 31, 2002. The General Partners believe that
the Partnership has sufficient cash on hand to meet its current working capital
needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
In October 2003, the Partnership entered into an agreement to sell the
Property in Lynchburg, Virginia. The Partnership sold this Property in January
2004. In December 2003, the Partnership entered into an agreement to sell the
Property in Cullman, Alabama. The Partnership sold this Property in February
2004.
In December 2003, the Partnership and CNL Income Fund XVI, Ltd., as
tenants-in-common, purchased a Property in Hoover, Alabama. The Partnership
contributed approximately $325,700 to acquire the land and has committed to fund
up to an additional $246,300 for construction costs relating to this Property.
The Partnership owns a 26% interest in this Property.
The Partnership has no contingent liabilities.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for as using either the direct financing or
the operating method. FAS 13 requires management to estimate the economic life
of the leased property, the residual value of the leased property and the
present value of minimum lease payments to be received from the tenant. In
addition, management assumes that all payments to be received under its leases
are collectible. Changes in management's estimates or assumptions regarding
collectibility of lease payments could result in a change in accounting for the
lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the
decision to sell or commits to a plan to sell a Property within one year, its
operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31,
2002
Rental revenues from continuing operations were $2,855,459 for the year
ended December 31, 2003, as compared to $2,962,204 during the same period of
2002. Rental revenues from continuing operations were lower during the year
ended December 31, 2003, as compared to the same period of 2002, because the
Partnership provided a rent reduction to the tenant of the Property in Yelm,
Washington when the tenant experienced financial difficulties in 2002. In March
2003, the Partnership executed a termination of the tenant's lease rights, and
the tenant surrendered the premises. The restaurant operated under a temporary
lease agreement with a new tenant until October 2003 when the Partnership
entered into a new lease with terms substantially the same as the Partnership's
other leases.
Rental revenues from continuing operations were also lower during 2003,
because the Partnership stopped recording rental revenues relating to the
Property in Dayton, Ohio when the tenant experienced financial difficulties.
During the third and fourth quarters of 2003, the Partnership collected and
recognized as revenues a portion of these past due rents. In addition, Denver
Joint Venture, in which the Partnership owns an 85% interest and accounts for
under the consolidation method, also stopped recording rental revenues when the
tenant of the Property owned by this joint venture experienced financial
difficulties.
In April 2003, a tenant, The Melodie Corporation, filed for bankruptcy.
The tenant has neither affirmed nor rejected the one lease it has with the
Partnership. Subsequent to the tenant filing for bankruptcy, the Partnership has
continued receiving rental payments relating to this lease.
During the year ended December 31, 2003, the Partnership also earned
$194,576 in contingent rental income, as compared to $294,891 during the same
period of 2002. The decrease in contingent rental income during 2003 was
primarily attributable to a decrease in the reported gross sales of certain
restaurant Properties, the leases of which require the payment of contingent
rental income. The decrease in contingent rental income during 2003 was also due
to the Partnership recording lower contingent rental income relating to the
Properties in Dayton, Ohio and Roswell, New Mexico, whose tenants experienced
financial difficulties.
The Partnership also earned $437,801 in income attributable to net
income earned by unconsolidated joint ventures during the year ended December
31, 2003, as compared to $863,810 during the same period of 2002. Net income
earned by unconsolidated joint ventures was higher during the year ended
December 31, 2002 partially because in June 2002, Ashland Joint Venture, in
which the Partnership owns a 62.16% interest, sold its Property in Ashland, New
Hampshire, to the tenant and recognized a gain on disposal of discontinued
operations of approximately $500,900. The Partnership recognized its pro-rata
share of this gain as equity in earnings of unconsolidated joint ventures. The
joint venture reinvested the majority of the net sales proceeds from this sale
in a Property in San Antonio, Texas.
Net income earned by unconsolidated joint ventures was also higher
during 2002 partially because the Partnership and an affiliate of the General
Partners, as tenants-in-common, collected and recognized as income approximately
$307,700 in past due amounts relating to the Property in Corpus Christi, Texas
that was formerly leased by Phoenix Restaurant Group, Inc. ("PRG"). The
Partnership owns a 72.58% interest in this Property. In October 2001, PRG filed
for bankruptcy. During 2002, the bankruptcy court assigned this lease to a new
tenant and all other lease terms remained the same. The new tenant is a Delaware
limited liability company and an affiliate of the General Partners.
The decrease in net income earned by unconsolidated joint ventures
during 2003 was partially offset by the Partnership reinvesting the majority of
the net sales proceeds from the sales of the Properties in Columbus, Ohio and
East Detroit, Michigan, in two Properties, one in Universal City and the other
in Schertz, Texas in June 2002. Each Property is held as a separate
tenancy-in-common arrangement with CNL Income Fund VI, Ltd. In addition, the
decrease was partially offset by the Partnership reinvesting a portion of the
net sales proceeds from the sale of the Property in Abilene, Texas in a Property
in Dalton, Georgia, as tenants-in-common with affiliates of the General
Partners, as described above.
During 2003, four lessees (or groups of affiliated lessees) of the
Partnership and its consolidated joint ventures, Jack in the Box Inc., Golden
Corral Corporation, Denny's Corporation, and Texas Taco Cabana, LP each
contributed more than 10% of total rental revenues (including total rental
revenues from the Partnership's consolidated joint ventures, and the
Partnership's share of total rental revenues from Properties owned by
unconsolidated joint ventures and Properties owned with affiliates of the
General Partners as tenants-in-common). As of December 31, 2003, Jack in the Box
Inc. was the lessee under leases relating to eight restaurants, Golden Corral
Corporation was the lessee under leases relating to three restaurants, Denny's
Corporation was the lessee under leases relating to six restaurants, and Texas
Taco Cabana, LP was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
these four lessees (or groups of affiliated lessees) will each continue to
contribute more than 10% of total rental revenues in 2004. In addition, five
Restaurant Chains, Jack in the Box, Burger King, Golden Corral, Denny's, and
Taco Cabana each accounted for more than 10% of total rental revenues during
2003 (including total rental revenues from the Partnership's consolidated joint
ventures, and the Partnership's share of total rental revenues from Properties
owned by unconsolidated joint ventures and Properties owned with affiliates of
the General Partners as tenants-in-common). In 2004, it is anticipated that Jack
in the Box, Burger King, Golden Corral, and Taco Cabana will each continue to
account for more than 10% of the total rental revenues to which the Partnership
is entitled under the terms of the leases. Any failure of these lessees or
Restaurant Chains will materially affect the Partnership's operating results if
the Partnership is not able to re-lease the Properties in a timely manner.
During the year ended December 31, 2003, the Partnership and its
consolidated joint ventures earned $9,547 in interest and other income, as
compared to $15,507 during the same period of 2002.
Operating expenses, including depreciation expense and provision for
write-down of assets, were $853,818 during the year ended December 31, 2003, as
compared to $825,326 for the same period of 2002. The increase in operating
expenses during the year ended December 31, 2003, as compared to the same period
of 2002, was a result of the Partnership recording a provision for write-down of
assets of approximately $67,700 relating to the Property in Yelm, Washington.
The provision represented the difference between the net carrying value of the
Property and its estimated fair value. The tenant of this Property experienced
financial difficulties. The Partnership entered into a new lease for this
Property in October 2003, as described above. The increase in operating expenses
during 2003 was also partially due to an increase in depreciation expense
relating to the Property in Yelm, Washington. The asset relating to this
Property was reclassified from net investment in direct financing leases to real
estate properties with operating leases when the tenant surrendered the premises
in March 2003.
The increase in operating expenses during 2003 was partially offset by
a decrease in the costs incurred for administrative expenses for servicing the
Partnership and its Properties and a decrease in property related expenses.
Property related expenses were higher during 2002 because the Partnership
elected to reimburse the tenant of the Properties in Oklahoma City, Oklahoma and
McAllen, Texas for certain renovation costs.
During the year ended December 31, 2002, the Partnership identified and
sold two Properties that were classified as Discontinued Operations in the
accompanying financial statements. During 2003, the Partnership identified for
sale four additional Properties that were classified as Discontinued Operations
in the accompanying financial statements. In March 2003, the Partnership sold
the Property in Abilene, Texas. The Partnership reclassified the assets relating
to the Properties in Lynchburg, Virginia; Cullman, Alabama; and Huntersville,
North Carolina to real estate held for sale. The reclassified assets were
recorded at the lower of their carrying amount or fair value, less cost to sell,
which resulted in the Partnership recording a provision for write-down of assets
of approximately $41,200 relating to the property in Lynchburg, Virginia. The
provision represented the difference between the net carrying value of the
property and its estimated fair value. The Partnership recognized net rental
income (rental revenues less Property related expenses and provision for
write-down of assets) of $624,406, during the year ended December 31, 2002,
relating to these Properties. Rental revenues during 2002 included approximately
$158,000 of past due rents relating to the Property in Abilene, Texas, that the
Partnership received and recognized as income. This Property was formerly leased
by PRG. In October 2001, PRG filed for bankruptcy and the Partnership stopped
recording rental revenues relating to this Property. During 2002, the bankruptcy
court assigned the lease relating to this Property to a new tenant and all other
lease terms remained the same. In June 2002, the Partnership sold the Properties
in Columbus, Ohio and East Detroit, Michigan to the tenant resulting in a gain
on disposal of discontinued operations of approximately $442,100. The
Partnership recognized net rental income of $233,093 during the year ended
December 31, 2003, relating to the Properties not sold during 2002. In March
2003, the Partnership sold the Property in Abilene, Texas, resulting in a gain
on disposal of discontinued operations of approximately $378,000. In 2004, the
Partnership sold its Properties in Lynchburg, Virginia; Cullman, Alabama; and
Huntersville, North Carolina resulting in a total gain on disposal of
discontinued operations of approximately $619,400.
During the year ended December 31, 2002, Ashland Joint Venture, in
which the Partnership owns a 62.16% interest, identified and sold the Property
in Ashland, New Hampshire, resulting in a gain on disposal of discontinued
operations of approximately $500,900. The financial results of this Property
were classified as Discontinued Operations in the combined, condensed financial
information for the unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates presented in the footnotes to the accompanying
financial statements. The Partnership's pro-rata share of these amounts is
included in equity in earnings of unconsolidated joint ventures in the
accompanying financial statements.
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental revenues from continuing operations were $2,962,204 for the year
ended December 31, 2002, as compared to $2,829,080 for the year ended December
31, 2001. Rental revenues from continuing operations were lower during 2001,
because PRG, the tenant of the Denny's Property in Avon, Colorado, experienced
financial difficulties and ceased paying rent in 2001. As a result, the
Partnership stopped recognizing rental revenues relating to this Property. In
October 2001, PRG filed for Chapter 11 bankruptcy protection. The Partnership
received rental payments relating to this Property from the bankruptcy date
through May 2002. In May 2002, the bankruptcy court assigned the lease to a new
tenant, CherryDen, LLC, an affiliate of the General Partners. All other lease
terms remained unchanged and are substantially the same as the Partnership's
other leases.
The increase in rental revenues from continuing operations during the
year ended December 31, 2002, as compared to the same period in 2001, was also
partially due to the 2001 acquisition of a Property in Houston, Texas. The
increase in rental revenues from continuing operations during the year ended
December 31, 2002 was partially offset by the 2001 sale of the Property in
Sebring, Florida and by a rent reduction of approximately $16,500 provided to
the tenant of the Property in Yelm, Washington. In October 2003, the Partnership
entered into a new lease relating to this Property, as described above.
The Partnership also earned $294,891 in contingent rental income during
the year ended December 31, 2002, as compared to $233,365 during the same period
of 2001. The increase in contingent rental income during 2002, as compared to
2001, was primarily attributable to an increase in the reported gross sales of
certain restaurant Properties, the leases of which require the payment of
contingent rental income.
During the years ended December 31, 2002 and 2001, the Partnership
recognized income of $863,810 and a loss of $147,538, respectively, attributable
to net operating results of unconsolidated joint ventures. These results were
lower during the year ended December 31, 2001, because PRG, the tenant of the
Property in Corpus Christi, Texas, filed for Chapter 11 bankruptcy protection in
October 2001, as described above. As a result, the Partnership and an affiliate
of the General Partners, as tenants-in-common, stopped recording rental revenues
relating to this Property. Results were also lower during the year ended
December 31, 2001, due to the Partnership incurring Property related expenses
such as legal fees, insurance and real estate taxes relating to this Property.
The tenancy in common recorded a provision for write-down of assets of
approximately $356,700 in 2001. The provision represented the difference between
the carrying value of the Property and its estimated fair value. In April 2002,
the bankruptcy court assigned the lease relating to this Property to a new
tenant, an affiliate of the General Partners. All other lease terms remained
unchanged and are substantially the same as the Partnership's other leases. As a
result of the assignment relating to this Property, the tenancy-in-common,
collected and recognized as revenue from the new tenant $309,700 in past due
rents.
The increase in net income earned by unconsolidated joint ventures
during 2002, was also partially due to the fact that in June 2002, Ashland Joint
Venture, in which the Partnership owns a 62.16% interest, sold its Property in
Ashland, New Hampshire, to the tenant and recognized a gain on disposal of
discontinued operations of approximately $500,900. The joint venture reinvested
the majority of the net sales proceeds from this sale in a Property in San
Antonio, Texas.
In addition, the increase in net income earned by unconsolidated joint
ventures during 2002 was partially due to the Partnership reinvesting the net
sales proceeds from the sale of two wholly owned Properties, in two Properties,
one in Universal City and the other in Schertz, Texas. Each Property is held as
a separate tenancy-in-common arrangement with CNL Income Fund VI, Ltd.
The increase in net income earned by unconsolidated joint ventures
during 2002, as compared to 2001, was partially offset by the fact that in
October 2001, the Partnership and CNL Income Fund VI, Ltd., as
tenants-in-common, sold the Property in Round Rock, Texas. The tenancy in common
recognized a gain on sale of assets of approximately $123,900 during 2001. The
Partnership owned a 23% interest in this Property.
The Partnership and its consolidated joint ventures earned $15,507 in
interest and other income during the year ended December 31, 2002, as compared
to $59,419 during the same period of 2002. Interest income decreased during 2002
due to the 2002 redemption of certificates of deposit held by the Partnership.
Operating expenses, including depreciation and provision for write-down
of assets, were $825,326 during the year ended December 31, 2003, as compared to
$1,299,312 during the same period of 2001. Operating expenses were higher during
the year ended December 31, 2001, because the Partnership recorded a provision
for write-down of assets of approximately $363,500 relating to the Property in
Avon, Colorado, as described above. During the year ended December 31, 2001, the
Partnership also recorded a provision for write-down of assets of approximately
$43,900 relating to the Property located in Sebring, Florida. The provisions
represented the difference between the carrying value of each Property and its
estimated fair value. Operating expenses were also higher during 2001 because
the Partnership incurred provisions for doubtful accounts and property related
expenses, such as real estate taxes, insurance and legal fees relating to the
Property in Avon, Colorado. The bankruptcy court assigned the lease relating to
this Property in May 2002, as described above, and the Partnership sold the
Property in Sebring, Florida in November 2001.
Operating expenses were also lower in 2002 because the Partnership
incurred less administrative expenses for servicing the Partnership and its
Properties. The decrease in operating expenses during the year ended December
31, 2002, as compared to the same period in 2001, was partially offset by the
fact that during the year ended December 31, 2002, the Partnership elected to
reimburse the tenant of the Properties in Oklahoma City, Oklahoma and McAllen,
Texas for certain renovation costs.
During the year ended December 31, 2002, the Partnership identified and
sold two Properties that were classified as Discontinued Operations in the
accompanying financial statements. During 2003, the Partnership identified for
sale four additional Properties that were classified as Discontinued Operations
in the accompanying financial statements. In March 2003, the Partnership sold
the Property in Abilene, Texas, as described above. The Partnership reclassified
the assets relating to the Properties in Lynchburg, Virginia; Cullman, Alabama;
and Huntersville, North Carolina to real estate held for sale. The reclassified
assets were recorded at the lower of their carrying amount or fair value, less
cost to sell. The Partnership recognized net rental income (rental revenues less
Property related expenses and provision for write-down of assets) of $624,406
and $110,158 during the years ended December 31, 2002 and 2001, respectively,
relating to these Properties. Rental revenues during 2002 included approximately
$158,000 of past due rents relating to the Property in Abilene, Texas, as
described above. During 2001, the Partnership recorded a provision for
write-down of assets of approximately $247,000 relating to the Property in
Abilene, Texas. The provision represented the difference between the net
carrying value of the Property and its estimated fair value. In June 2002, the
Partnership sold the Properties in Columbus, Ohio and East Detroit, Michigan to
the tenant resulting in a gain on disposal of discontinued operations of
approximately $442,100. In 2004, the Partnership sold the Properties in
Lynchburg, Virginia; Cullman, Alabama; and Huntersville, North Carolina.
In addition, during the year ended December 31, 2002, Ashland Joint
Venture, in which the Partnership owns a 62.16% interest, identified and sold
the Property in Ashland, New Hampshire, resulting in a gain on disposal of
discontinued operations of approximately $500,900. The financial results of this
Property were classified as Discontinued Operations in the combined, condensed
financial information for the unconsolidated joint ventures and the properties
held as tenants-in-common with affiliates presented in the footnotes to the
accompanying financial statements. The Partnership's pro-rata share of these
amounts is included in equity in earnings of unconsolidated joint ventures in
the accompanying financial statements.
In connection with the sale of the Property in Sebring, Florida, the
Partnership recognized a gain on sale of assets of approximately $8,600 during
2001. Because this Property was identified for sale prior to the January 2002
implementation of Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", the results of
operations relating to this Property were included as Income from Continuing
Operations in the accompanying financial statements.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003, are generally
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation may cause capital
appreciation of the Partnership's Properties. Inflation and changing prices,
however, also may have an adverse impact on the sales of the restaurants and on
potential capital appreciation of the Properties.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify certain
financial instruments as liabilities (or assets in some circumstances) that
previously were classified as equity. One requirement of FAS 150 is that
minority interests for majority owned finite lived entities be classified as a
liability and recorded at fair market value. FAS 150 initially applied
immediately to all financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite lived
Partnerships. The deferral of these provisions is expected to remain in effect
while these interests are addressed in either Phase II of the FASB's Liabilities
and Equity project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these provisions has
been stated. The implementation of the currently effective aspects of FAS 150
did not have an impact on the Partnership's results of operations. The
implementation of the provisions of FAS 150 that have been deferred is not
expected to have a material impact on the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 20
Financial Statements:
Balance Sheets 21
Statements of Income 22
Statements of Partners' Capital 23
Statements of Cash Flows 24-25
Notes to Financial Statements 26-38
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund XI, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund XI, Ltd. (a Florida limited
partnership) at December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 15(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
25CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 18,600,884 $ 18,348,413
Net investment in direct financing leases 4,082,453 4,874,830
Real estate held for sale 2,423,207 3,079,673
Investment in joint ventures 5,409,308 4,414,071
Cash and cash equivalents 1,669,350 1,763,878
Receivables, less allowance for doubtful accounts of
$131,618 and $23,196, respectively 164,328 228,276
Due from related parties -- 2,412
Accrued rental income 1,354,872 1,472,723
Other assets 137,657 135,940
------------------- -------------------
$ 33,842,059 $ 34,320,216
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 8,263 $ 3,271
Real estate taxes payable 25,656 15,632
Distributions payable 875,006 1,075,006
Due to related parties 16,161 20,101
Rents paid in advance and deposits 186,219 163,020
------------------- -------------------
Total liabilities 1,111,305 1,277,030
Minority interests 495,134 507,991
Commitments (Note 11)
Partners' capital 32,235,620 32,535,195
------------------- -------------------
$ 33,842,059 $ 34,320,216
=================== ===================
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
----------------- --------------- ---------------
Revenues:
Rental income from operating leases $ 2,281,532 $ 2,299,481 $ 2,150,403
Earned income from direct financing leases 573,927 662,723 678,677
Contingent rental income 194,576 294,891 233,365
Interest and other income 9,547 15,507 59,419
---------------
----------------- ---------------
3,059,582 3,272,602 3,121,864
----------------- --------------- ---------------
Expenses:
General operating and administrative 255,177 277,616 327,336
Property related 53,535 84,743 92,307
Provision for doubtful accounts -- -- 12,765
Management fees to related parties 40,137 44,392 36,076
State and other taxes 33,811 31,779 29,022
Depreciation 403,464 386,796 394,396
Provision for write-down of assets 67,694 -- 407,410
----------------- --------------- ---------------
853,818 825,326 1,299,312
----------------- --------------- ---------------
Income before gain on sale of assets, minority interests,
and equity in earnings (loss) of unconsolidated
joint ventures 2,205,764 2,447,276 1,822,552
Gain on sale of assets -- -- 8,604
Minority interests (54,170 ) (63,512 ) (66,460 )
Equity in earnings (loss) of unconsolidated joint ventures 437,801 863,810 (147,538 )
----------------- --------------- ---------------
Income from continuing operations 2,589,395 3,247,574 1,617,158
----------------- --------------- ---------------
Discontinued operations
Income from discontinued operations 233,093 624,406 110,158
Gain on disposal of discontinued operations 377,961 442,146 --
----------------- --------------- ---------------
611,054 1,066,552 110,158
----------------- --------------- ---------------
Net income $ 3,200,449 $ 4,314,126 $ 1,727,316
================= =============== ===============
Income per limited partner unit
Continuing operations $ 0.65 $ 0.81 $ 0.40
Discontinued operations 0.15 0.27 0.03
----------------- --------------- ---------------
$ 0.80 $ 1.08 $ 0.43
================= =============== ===============
Weighted average number of
limited partner units outstanding 4,000,000 4,000,000 4,000,000
================= =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
General Partners Limited Partners
-------------------------------------- ---------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2000 $ 1,000 $ 241,465 $ 40,000,000 $ (29,215,182 ) $ 27,456,518
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,500,024 ) --
Net income -- -- -- -- 1,727,316
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2001 1,000 241,465 40,000,000 (32,715,206 ) 29,183,834
Distributions to limited
partners ($0.93 per
limited partner unit) -- -- -- (3,700,024 ) --
Net income -- -- -- -- 4,314,126
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2002 1,000 241,465 40,000,000 (36,415,230 ) 33,497,960
Distributions to limited
partners ($0.88 per
limited partner unit) -- -- -- (3,500,024 ) --
Net income -- -- -- -- 3,200,449
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2003 $ 1,000 $ 241,465 $ 40,000,000 $ (39,915,254 ) $ 36,698,409
================== ================ ================= ================ =================
See accompanying notes to financial statements.
- ---------------
Syndication
Costs Total
-------------- --------------
$ (4,790,000 ) $33,693,801
-- (3,500,024 )
-- 1,727,316
-------------- --------------
(4,790,000 ) 31,921,093
-- (3,700,024 )
-- 4,314,126
-------------- --------------
(4,790,000 ) 32,535,195
-- (3,500,024 )
-- 3,200,449
-------------- --------------
$ (4,790,000 ) $32,235,620
============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------------- --------------- ---------------
Cash flows from operating activities
Net income $ 3,200,449 $ 4,314,126 $ 1,727,316
---------------- --------------- ---------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 403,464 397,899 423,468
Amortization of investment in direct financing leases 189,435 172,789 1,629
Minority interests 54,170 63,512 66,460
Equity in earnings (loss) of unconsolidated joint
ventures, net of distributions 52,430 (184,950 ) 338,292
Gain on sale of assets (377,961 ) (442,146 ) (8,604 )
Provision for write-down of assets 108,848 -- 654,393
Provision for doubtful accounts -- -- 34,443
Decrease (increase) in receivables 63,948 (71,580 ) 12,284
Decrease in due from related party 2,412 1,749 1,372
Decrease (increase) in accrued rental income 58,579 (75,539 ) (90,221 )
Decrease(increase) in other assets (1,717 ) (2,396 ) 109,374
Increase (decrease) in accounts payable and accrued
expenses and real estate taxes payable 15,016 (44,435 ) 16,859
Increase (decrease) in due to related parties (3,940 ) 3,400 (5,801 )
Increase (decrease) in rents paid in advance and
deposits 23,199 96,807 (13,565 )
---------------- --------------- ---------------
Total adjustments 587,883 (84,890 ) 1,540,383
---------------- --------------- ---------------
Net cash provided by operating activities 3,788,332 4,229,236 3,267,699
---------------- --------------- ---------------
Cash Flows from Investing Activities:
Additions to real estate properties -- -- (1,376,792 )
Proceeds from sale of assets 931,858 1,734,373 1,029,000
Investment in joint ventures (1,047,667 ) (1,839,798 ) --
Liquidating distribution from joint venture -- -- 345,376
Investment in certificates of deposit -- -- (211,587 )
Redemption of certificates of deposit -- 211,587 500,000
---------------- --------------- ---------------
Net cash provided by (used in) investing activities (115,809 ) 106,162 285,997
---------------- --------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,700,024 ) (3,500,024 ) (3,500,024 )
Distributions to holders of minority interest (67,027 ) (64,898 ) (66,890 )
---------------- --------------- ---------------
Net cash used in financing activities (3,767,051 ) (3,564,922 ) (3,566,914 )
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (94,528 ) 770,476 (13,218 )
Cash and cash equivalents at beginning of year 1,763,878 993,402 1,006,620
---------------- --------------- ---------------
Cash and cash equivalents at end of year $ 1,669,350 $ 1,763,878 $ 993,402
================ =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
2003 2002 2001
--------------- --------------- --------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Distributions declared and unpaid at
December 31 $ 875,006 $ 1,075,006 $ 875,006
=============== =============== ==============
Addition to real estate properties $ -- $ 32,553 $ --
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund XI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the real
estate property acquisitions at cost. These properties are leased to
third parties on a triple-net basis, whereby the tenant is generally
responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance and repairs. During
the years ended December 31, 2003, 2002 and 2001, tenants paid, or are
expected to pay, directly to real estate taxing authorities
approximately $397,700, $428,800 and $400,900, respectively, in
estimated real estate taxes in accordance with the terms of their
leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The Partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
operating or the direct financing methods.
Operating method - Real estate property leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce
a constant periodic rent over the lease term commencing on the
date the property is placed in service.
Direct financing method - Leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset). Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on the Partnership's net investment in
the leases. For the leases classified as direct financing
leases, the building portions of the property leases are
accounted for as direct financing leases while the land
portions of the majority of these leases are operating leases.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
Substantially all leases are for 14 to 20 years and provide for minimum
and contingent rentals. The lease options generally allow tenants to
renew the leases for two to five successive five-year periods subject
to the same terms and conditions as the initial lease. Most leases also
allow the tenant to purchase the property at fair market value after a
specified portion of the lease has elapsed.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, plus any accrued rental income, are removed from the
accounts and gains or losses from sales are reflected in income. The
general partners of the Partnership review properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations. The
general partners determine whether an impairment in value has occurred
by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the
individual property. If an impairment is indicated, the assets are
adjusted to the estimated fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is recorded to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 85%
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport
Joint Venture using the consolidation method. Minority interests
represent the minority joint venture partners' proportionate share of
equity in the Partnership's consolidated joint ventures. All
significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in Ashland Joint Venture, Des Moines Real
Estate Joint Venture and Portsmouth Joint Venture and the properties in
Corpus Christi, Universal City and Schertz, Texas, Dalton, Georgia and
Hoover, Alabama, each held as tenants-in-common, are accounted for
using the equity method since each joint venture agreement requires the
consent of all partners on all key decisions affecting the operations
of the underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks, money market funds and certificates of
deposit with less than a 90-day maturity date. Cash equivalents are
stated at cost plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks, money market funds and certificates of
deposit with less than a 90-day maturity date may exceed federally
insured levels; however, the Partnership has not experienced any losses
in such accounts.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
Rents Paid in Advance - Rents paid in advance by lessees for future
periods are deferred upon receipt and are recognized as revenues during
the period in which the rental income is earned.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
The more significant use of management estimates relate to the
allowance for doubtful accounts and future cash flows associated with
long-lived assets. Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2003 presentation.
These reclassifications had no effect on partner's capital, net income,
or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. The assessment is based on the
carrying amount of the asset at the date it is tested for
recoverability. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds its estimated fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The General Partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Statement of Financial Accounting Standards No. 150 - In May 2003, the
FASB issued FASB Statement No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS
150"). FAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify
certain financial instruments as liabilities (or assets in some
circumstances) that previously were classified as equity. One
requirement of FAS 150 is that minority interests for majority owned
finite lived entities be classified as a liability and recorded at fair
market value. FAS 150 initially applied immediately to all financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning
after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite
lived Partnerships. The deferral of these provisions is expected to
remain in effect while these interests are addressed in either Phase II
of the FASB's Liabilities and Equity project or Phase II of the FASB's
Business Combinations project; therefore, no specific timing for the
implementation of these provisions has been stated. The implementation
of the currently effective aspects of FAS 150 did not have an impact on
the Partnership's results of operations. The implementation of the
provisions of FAS 150 that have been deferred is not expected to have a
material impact on the Partnership's results of operations.
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
----------------- ----------------
Land $ 10,597,700 $ 10,597,700
Buildings 12,164,871 11,508,936
----------------- ----------------
22,762,571 22,106,636
Less accumulated depreciation (4,161,687 ) (3,758,223 )
----------------- ----------------
$ 18,600,884 $ 18,348,413
================= ================
In August 2002, the Partnership received a parcel of land adjacent to
its Property in Roswell, New Mexico from the tenant of the
Partnership's property as payment for approximately $32,500 of rental
revenues owed. The parcel of land is developed as a parking lot which
is contiguous to the parking lot of the Partnership's Property. The
Partnership accounted for this transaction as a non-monetary exchange
of assets at their fair value. No gain or loss was recognized on this
transaction.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2003:
2004 $ 2,427,882
2005 2,437,697
2006 2,255,041
2007 1,851,977
2008 1,764,236
Thereafter 6,030,281
-----------------
Total (1) $ 16,767,114
=================
(1) Excludes two properties that were sold in 2004
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct
financing leases at December 31:
2003 2002
----------------- -----------------
Minimum lease payments
receivable $ 6,290,088 $ 8,229,672
Estimated residual values 1,462,721 1,691,985
Less unearned income (3,670,356 ) (5,046,827 )
----------------- -----------------
Net investment in direct
financing leases $ 4,082,453 $ 4,874,830
================= =================
During 2003, the Partnership recorded a provision for write-down of
assets of approximately $67,700 relating to the property in Yelm,
Washington. The provision represented the difference between the net
carrying value of the property and its estimated fair value. The tenant
of this property experienced financial difficulties, and in March 2003,
the Partnership executed a termination of the tenant's lease rights,
and the tenant surrendered the premises. As a result, the Partnership
reclassified this property, the building portion of which had been
classified as a direct financing lease, to real estate properties with
operating leases. No loss on the reclassification was recorded.
The following is a schedule of future minimum lease payments to be
received on the direct financing leases at December 31, 2003:
2004 $ 713,002
2005 713,002
2006 713,002
2007 724,128
2008 741,986
Thereafter 2,684,968
----------------
Total (1) $ 6,290,088
================
(1) Excludes three properties that were sold in 2004
4. Investment in Joint Ventures
The Partnership has a 62.16%, 76.6%, and a 42.8% interest in the
profits and losses of Ashland Joint Venture, Des Moines Real Estate
Joint Venture, and Portsmouth Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of
the Partnership which have the same general partners. In addition, the
Partnership owns a 72.58% interest in a property in Corpus Christi,
Texas, as tenants-in-common with an affiliate of the general partners.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
In June 2002, the Partnership invested in two properties in Universal
City and Schertz, Texas, as two separate tenants-in-common arrangements
with CNL Income Fund VI, Ltd., a Florida limited partnership and
affiliate of the general partners. The Partnership acquired both
properties from CNL Funding 2001-A, LP, an affiliate of the general
partners. The Partnership and CNL Income Fund VI, Ltd. entered into
agreements whereby each co-tenant will share in the profits and losses
of each property in proportion to its applicable percentage interest.
The Partnership contributed approximately $897,200 and $942,500 for an
85.8% and a 90.5% interest, respectively, in these properties.
In June 2002, Ashland Joint Venture, in which the Partnership owns a
62.16% interest, sold its Burger King property in Ashland, New
Hampshire to the tenant and received net sales proceeds of
approximately $1,472,900, resulting in a gain of approximately
$500,900. The financial results relating to this property are reflected
as Discontinued Operations in the combined condensed financial
information presented below. In June 2002, the joint venture reinvested
the majority of these net sales proceeds in a property in San Antonio,
Texas. The joint venture acquired the property from CNL Funding 2001-A,
LP, an affiliate of the general partners, at an approximate cost of
$1,343,000.
In November 2003, the Partnership and CNL Income Fund VI, Ltd, CNL
Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., as
tenants-in-common, invested in a property in Dalton, Georgia. The
Partnership contributed $722,000 for a 38% interest in the property. In
December 2003, the Partnership and CNL Income Fund XVI, Ltd., as
tenants-in-common, invested in a property in Hoover, Alabama. The
Partnership contributed approximately $325,700 to pay for construction
costs and owns a 26% interest in the property. The Partnership and
affiliates entered into agreements whereby each co-venturer will share
in the profits and losses of the respective property in proportion to
its applicable percentage interest. Each of the CNL Income Funds is an
affiliate of the general partners.
Ashland Joint Venture, Des Moines Real Estate Joint Venture, Portsmouth
Joint Venture and the Partnership and affiliates, as tenants-in-common
in five separate tenancy in common arrangements, each own one property.
The following presents the combined condensed financial information for
the unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates at:
December 31,
2003 2002
-------------------- ------------------
Real estate properties with operating
leases, net $ 8,436,036 $ 5,551,686
Net investment in direct financing lease 303,930 308,883
Cash 51,830 18,815
Receivables 153,552 --
Accrued rental income 167,908 142,283
Other assets 19,582 8,466
Liabilities 14,114 10,549
Partners' capital 9,118,724 6,019,584
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
Year ended December 31,
2003 2002 2001
-------------- -------------- ----------------
Continuing Operations:
Revenues $ 746,906 $ 848,807 $ 329,956
Expenses (138,325 ) (100,798 ) (201,380 )
Provision for write-down of assets -- -- (356,719 )
Gain on disposal of assets -- -- 123,893
-------------- -------------- ----------------
Income (loss) from continuing operations $ 608,581 748,009 (104,250 )
-------------- -------------- ----------------
Discontinued Operations:
Revenues -- 51,147 126,250
Expenses -- (24,220 ) (42,327 )
Gain on disposal of discontinued operations -- 500,912 --
-------------- -------------- ----------------
-- 527,839 83,923
-------------- -------------- ----------------
Net income (loss) $ 608,581 $ 1,275,848 $ (20,327 )
============== ============== ================
The Partnership recognized income totaling $437,801 and $863,810 for
the years ended December 31, 2003 and 2002, respectively, and a loss of
$147,538 for the year ended December 31, 2001, from these joint
ventures and the properties held as tenants-in-common with affiliates
of the general partners.
5. Discontinued Operations
During 2002, the Partnership identified and sold its Burger King
properties in Columbus, Ohio and East Detroit, Michigan to the tenant
and received net sales proceeds of approximately $1,734,400, resulting
in a total gain on disposal of discontinued operations of approximately
$442,100. During 2003, the Partnership identified for sale four
additional properties. These six properties were classified as
Discontinued Operations in the accompanying financial statements. In
March 2003, the Partnership sold the property in Abilene, Texas, to the
tenant and received approximately $931,900 in net sales proceeds,
resulting in a gain on disposal of discontinued operations of
approximately $378,000. The Partnership reclassified the assets
relating to the properties in Lynchburg, Virginia; Cullman, Alabama;
and Huntersville, North Carolina to real estate held for sale. The
reclassified assets were recorded at the lower of their carrying amount
or fair value, less cost to sell, which resulted in the Partnership
recording a provision for write-down of assets of approximately $41,200
relating to the property in Lynchburg, Virginia. The provision
represented the difference between the net carrying value of the
property and its estimated fair value.
The operating results of the discontinued operations for these
properties are as follows:
Year Ended December 31,
2003 2002 2001
-------------- --------------- --------------
Rental revenues $ 283,437 $ 594,366 $ 438,983
Other income 1,947 42,217 --
Expenses (11,137 ) (12,177 ) (81,842 )
Provision for write-down of assets (41,154 ) -- (246,983 )
-------------- --------------- --------------
Income from discontinued operations $ 233,093 $ 624,406 $ 110,158
============== =============== ==============
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
6. Allocations and Distributions
From inception through December 31, 1999, generally, all net income and
net losses of the Partnership, excluding gains and losses from the sale
of properties, were allocated 99 percent to the limited partners and
one percent to the general partners. From inception through December
31, 1999, distributions of net cash flow were made 99 percent to the
limited partners and one percent to the general partners. However, the
one percent of net cash flow to be distributed to the general partners
was subordinated to receipt by the limited partners of an aggregate,
ten percent, cumulative, noncompounded annual return on their invested
capital contributions (the "Limited Partners' 10% Return").
From inception through December 31, 1999, generally, net sales proceeds
from the sale of properties not in liquidation of the Partnership, to
the extent distributed, were distributed first to the limited partners
in an amount sufficient to provide them with their Limited Partners'
10% Return, plus the return of their adjusted capital contributions.
The general partners then received, to the extent previously
subordinated and unpaid, a one percent interest in all prior
distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds were distributed 95 percent
to the limited partners and five percent to the general partners. Any
gain from the sale of a property not in liquidation of the Partnership
was, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property was, in general,
allocated first, on a pro rata basis, to partners with positive
balances in their capital accounts; and thereafter, 95 percent to the
limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties,
will be used in the following order: (i) first to pay and discharge all
of the Partnership's liabilities to creditors, (ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, (iii) third,
to pay all of the Partnership's liabilities, if any, to the general and
limited partners, (iv) fourth, after allocations of net income, gains
and/or losses, to distribute to the partners with positive capital
accounts balances, in proportion to such balances, up to amounts
sufficient to reduce such positive balances to zero, and (v)
thereafter, any funds remaining shall then be distributed 95 percent to
the limited partners and five percent to the general partners.
Effective January 1, 2000, the general partners waived their right to
receive future distributions from the Partnership, including both
distributions of operating cash flow and distributions of liquidation
proceeds, to the extent that the cumulative amount of such
distributions would exceed the balance in the general partners' capital
account as of December 31, 1999. Accordingly, for years commencing
January 1, 2000 and after, the Partnership's net income will be
allocated entirely among the limited partners. However, if losses are
allocated to the general partners in a year, an amount of income equal
to the sum of such losses may be allocated to the general partners in
succeeding years. Accordingly, the general partners were not allocated
any net income and did not receive any distributions during the years
ended December 31, 2003, 2002, and 2001.
During the year ended December 31, 2002, the Partnership declared
distributions to the Limited Partners of $3,700,024. During each of the
years ended December 31, 2003 and 2001, the Partnership declared
distributions to the Limited Partners of $3,500,024. During the quarter
ended December 31, 2002, the Partnership declared a special
distribution to the limited partners of $200,000, which represented
cumulative excess operating reserves. This special distribution was
effectively a return of a portion of the limited partners' investment,
although in accordance with the partnership agreement, $200,000 was
applied toward the limited partners' 10% Preferred Return. No
distributions have been made to the general partners to date.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
7. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
2003 2002 2001
-------------- -------------- ---------------
Net income for financial reporting purposes $ 3,200,449 $ 4,314,126 $ 1,727,316
Effect of timing differences relating to
depreciation (52,014 ) (80,379 ) (69,778 )
Effect of timing differences relating to gains on
sales of assets (119,036 ) (438,269 ) 51,426
Direct financing leases recorded as operating
leases for tax reporting purposes 189,435 172,789 138,491
Effect of timing differences relating to equity
in earnings of unconsolidated joint ventures 7,814 (430,774 ) 433,308
Accrued rental income 58,579 (67,582 ) (119,338 )
Rents paid in advance 23,199 96,807 (13,565 )
Effect of timing differences relating to allowance
for doubtful accounts 108,422 (463,931 ) 347,670
Provision for write-down of assets 108,848 -- 654,393
Effect of timing differences relating to minority
interests (16,483 ) 1,124 5,385
Other (406 ) -- --
-------------- -------------- ---------------
Net income for federal income tax purposes $ 3,508,807 $ 3,103,911 $ 3,155,308
============== ============== ===============
8. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Holdings, Inc. The other individual
general partner, Robert A. Bourne, serves as President and Treasurer of
CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings,
Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL Restaurant
Properties, Inc. (formerly known as CNL American Properties Fund, Inc.)
served as the Partnership's advisor until January 1, 2002, when it
assigned its rights and obligations under a management agreement to RAI
Restaurants, Inc. (the "Advisor"). The Advisor is a wholly owned
subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP"). The
individual general partners are stockholders and directors of CNL-RP.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions - Continued
The Advisor provides services pursuant to a management agreement with
the partnership. In connection therewith, the Partnership agreed to pay
certain Advisor management fees of one percent of the sum of gross
revenues from properties wholly owned by the Partnership and the
Partnership's allocable share of gross revenues from joint ventures.
The Partnership incurred management fees of $40,137, $44,392, and
$36,076, for the years ended December 31, 2003, 2002, and 2001,
respectively.
The Advisor is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission
or three percent of the sales price if the Advisor provides a
substantial amount of services in connection with the sale. However, if
the sales proceeds are reinvested in a replacement property, no such
real estate disposition fees will be incurred until such replacement
property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to the
receipt by the limited partners of their aggregate 10% Preferred
Return, plus their adjusted capital contributions. No deferred,
subordinated real estate disposition fees have been incurred since
inception.
During the years ended December 31, 2003, 2002, and 2001, the
Partnership's affiliates provided accounting and administrative
services. The Partnership incurred $145,513, $192,286, and $219,365,
for the years ended December 31, 2003, 2002, and 2001, respectively,
for such services.
During 2001, Phoenix Restaurant Group, Inc. ("PRG") filed for
bankruptcy and neither rejected, nor affirmed the three leases it had
with the Partnership, including a lease held with an affiliate of the
general partners, as tenants-in-common. The Partnership owns a 72.58%
interest in the tenancy in common. During 2002, the bankruptcy court
assigned the leases relating to the properties in Avon, Colorado; and
Abilene and Corpus Christi, Texas to CherryDen, LLC; SWAC, LLC; and
RAI, LLC, respectively. CherryDen, LLC and RAI, LLC are affiliates of
the general partners. All other lease terms remained the same. In
connection with the lease for the property in Avon, Colorado, the
Partnership recognized rental revenues of approximately $176,000 and
$110,900 during the years ended December 31, 2003 and 2002,
respectively. The tenancy in common recognized rental revenues of
approximately $190,600 and $127,800 relating to the property in Corpus
Christi, Texas during the years ended December 31, 2003 and 2002,
respectively. The Partnership recognized its pro-rata share of these
amounts in equity in earnings of unconsolidated joint ventures in the
accompanying financial statements.
In June 2002, the Partnership and CNL Income Fund VI, Ltd. acquired two
properties, one in Universal City, Texas and one in Schertz, Texas,
each as a separate tenancy in common arrangement, from CNL Funding
2001-A, LP, for a total of approximately $2,087,200. In addition, in
June 2002, Ashland Joint Venture acquired a property in San Antonio,
Texas, from CNL Funding 2001-A, LP, for approximately $1,343,000. CNL
Funding 2001-A, LP, an affiliate of the general partners, had purchased
and temporarily held title to the properties in order to facilitate the
acquisition of the properties by the Partnership. The purchase price
paid by the Partnership and CNL Income Fund VI, Ltd. and the joint
venture represented the costs incurred by CNL Funding 2001-A, LP to
acquire and carry the properties.
The due to related parties at December 31, 2003 and 2002, totaled
$16,161 and $20,101, respectively.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
9. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than ten percent of total rental
revenues (including total rental revenues from the Partnership's
consolidated joint ventures and the Partnership's share of total rental
revenues from the unconsolidated joint ventures and the properties held
as tenants-in-common with affiliates of the General Partners), for each
of the years ended December 31:
2003 2002 2001
--------------- --------------- ---------------
Jack in the Box Inc. and Jack in
the Box Eastern Division,
L.P. $ 768,074 $ 768,074 $ 768,070
Golden Corral Corporation 640,722 675,245 600,548
Denny's, Inc and Denny's Corporation 450,194 N/A N/A
Texas Taco Cabana, LP 406,287 N/A N/A
Burger King Corporation and
BK Acquisition, Inc. N/A 479,251 621,123
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than ten percent
of total rental revenues (including total rental revenues from the
Partnership's consolidated joint ventures and the Partnership's share
of total rental revenues from the unconsolidated joint ventures and the
properties held as tenants-in-common with affiliates of the General
Partners), for each of the years ended December 31:
2003 2002 2001
---------------- ------------------ ----------------
Jack in the Box $ 768,074 $ 768,074 $ 588,204
Burger King 663,671 969,360 1,148,827
Golden Corral Buffet and
Grill 640,722 675,245 600,548
Denny's 604,389 907,510 492,804
Taco Cabana 406,287 N/A N/A
The information denoted by N/A indicates that for each period
presented, the tenant or chain did not represent more than ten percent
of the Partnership's total rental revenues.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains will significantly impact the operating results of
the Partnership if the Partnership is not able to re-lease the
Properties in a timely manner.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2003 and
2002.
2003 Quarter First Second Third Fourth Year
-------------------------------- ----------- ------------- ------------ ------------- ------------
Continuing Operations (1):
Revenues $ 738,582 $ 679,213 $ 733,367 $ 908,420 $3,059,582
Equity in earnings of
unconsolidated joint
ventures 99,535 110,959 110,325 116,982 437,801
Income from continuing
operations 609,499 515,622 643,394 820,880 2,589,395
Discontinued Operations (1):
Revenues 86,141 64,102 66,618 68,523 285,384
Income from and gain on
disposal of discontinued
operations 460,617 64,102 19,165 67,170 611,054
Net income 1,070,116 579,724 662,559 888,050 3,200,449
Income per limited partner unit:
Continuing operations $ 0.15 $ 0.13 $ 0.17 $ 0.20 $ 0.65
Discontinued operations 0.12 0.01 -- 0.02 0.15
----------- ------------- ------------ ------------- ------------
$ 0.27 $ 0.14 $ 0.17 $ 0.22 $ 0.80
=========== ============= ============ ============= ============
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
2002 Quarter First Second Third Fourth Year
-------------------------------- ----------- ------------- ------------ ------------- ------------
Continuing Operations (1):
Revenues $ 756,074 $ 766,295 $ 809,290 $ 940,943 $3,272,602
Equity in earnings
of unconsolidated
joint ventures 57,219 584,639 118,993 102,959 863,810
Income from continuing
operations 572,278 1,092,691 737,856 844,749 3,247,574
Discontinued Operations (1):
Revenues 124,953 328,446 92,259 90,925 636,583
Income from and gain on
disposal of discontinued
operations 117,290 766,482 91,706 91,074 1,066,552
Net income 689,568 1,859,173 829,562 935,823 4,314,126
Income per limited partner unit:
Continuing operations $ 0.14 $ 0.27 $ 0.19 $ 0.21 $ 0.81
Discontinued operations 0.03 0.19 0.02 0.03 0.27
----------- ------------- ------------ ------------- ------------
$ 0.17 $ 0.46 $ 0.21 $ 0.24 $ 1.08
=========== ============= ============ ============= ============
(1) Certain items in the quarterly financial data have been reclassified to
conform to the 2003 presentation. This reclassification had no effect
on net income. The results of operations relating to properties that
were identified for sale as of December 31, 2001 but sold subsequently
are reported as continuing operations. The results of operations
relating to properties that were either identified for sale and
disposed of subsequent to January 1, 2002 or were classified as held
for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
11. Commitments
In October 2003, the Partnership entered into an agreement with a third
party to sell the property in Lynchburg, Virginia. In addition, in
December 2003, the Partnership entered into an agreement to sell the
Property in Cullman, Alabama.
12. Subsequent Events
In January 2004, the Partnership sold its Property in Lynchburg,
Virginia to a third party and received net sales proceeds of
approximately $960,000, resulting in a gain on disposal of discontinued
operations of approximately $3,800.
In February 2004, the Partnership sold its Property in Cullman, Alabama
to a third party and received net sales proceeds of approximately
$1,045,600, resulting in a gain on disposal of discontinued operations
of approximately $349,100.
In March 2004, the Partnership sold its Property in Huntersville, North
Carolina to a third party and received net sales proceeds of
approximately $1,035,600, resulting in a gain on disposal of
discontinued operations of approximately $266,400.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The General Partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL-RP, CCM, CNL Financial Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. Since 1971, Mr. Seneff has been active in
the acquisition, development, and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has
served as Director and Chairman of the Board of CNL-RP, a public, unlisted real
estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer
of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from
December 2000 through September 2003. Mr. Seneff served as Chairman of the Board
and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, from its inception in 1990 until it merged with a
wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors,
Inc., formerly CNL Institutional Advisors, Inc., is a registered investment
advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent
company of CNL Financial Group, Inc., a diversified real estate company, and has
served as a Director, Chairman of the Board and Chief Executive Officer of CNL
Financial Group, Inc. since 1973. CNL Financial Group, Inc. is and is the parent
company, either directly or indirectly through subsidiaries, of CNL Real Estate
Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL
Securities Corp., all of which are engaged in the business of real estate
finance. Mr. Seneff also serves as a Director and Chairman of the Board of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from
its inception in 1997 until 2003 and served as Co-Chief Executive Officer from
February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board
of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since
its inception in 1997. Mr. Seneff also served as Chief Executive Officer from
its inception in 1997 through February 2003, and currently serves as Co-Chief
Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and
Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief
Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement
Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real
estate investment trust. Mr. Seneff has also served as Director and Chairman of
the Board of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, since 1992 and served as
Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through
February 2004. Mr. Seneff has served as a Director, Chairman of the Board, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff has
served as Chairman of the Board and Chief Executive Officer of CNL Commercial
Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of
CNLBank, an independent, state-chartered commercial bank. Mr. Seneff previously
served on the Florida State Commission on Ethics and is a former member and past
Chairman of the State of Florida Investment Advisory Council, which recommends
to the Florida Board of Administration investments for various Florida employee
retirement funds. The Florida Board of Administration, Florida's principal
investment advisory and money management agency, oversees the investment of the
Florida state retirement plan. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 56. Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne has
served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr.
Bourne also served as President of CNL-RP from 1994 through February 1999 and
served as Treasurer from February 1999 through August 1999 and from May 1994
through December 1994. Mr. Bourne served in various executive positions with CNL
Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP
including, President from 1994 through September 1997, and Director from 1994
through August 1999. Mr. Bourne serves as President and Treasurer of CNL
Financial Group, Inc. Mr. Bourne serves as Director, Vice Chairman of the Board
and Treasurer and from 1997 until June 2002 served as President of CNL
Hospitality Properties, Inc. and as Director, President and Treasurer of CNL
Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL
Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement
Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also served as
a Director since 1992, Vice Chairman of the Board since February 1996, Secretary
and Treasurer from February 1996 through 1997, and President from July 1992
through February 1996, of Commercial Net Lease Realty, Inc. Mr. Bourne serves as
Director, President and Treasurer for various affiliates of CNL Financial Group,
Inc. including, CNL Investment Company, CNL Securities Corp. and CNL
Institutional Advisors, Inc. Mr. Bourne began his career as a certified public
accountant employed by Coopers & Lybrand, Certified Public Accountants, from
1971 through 1978, where he attained the position of Tax Manager in 1975. Mr.
Bourne graduated from Florida State University in 1970 where he received a B.A.
in Accounting, with honors.
Curtis B. McWilliams, age 48. Mr. McWilliams has served as President of
CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September
2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from
December 2000 through September 2003 and served as Chief Executive Officer from
September 1999 through December 2000. Mr. McWilliams also served as President
and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned
subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from
February 1999 until September 1999 and as Executive Vice President of CNL-RP
from 1997 through February 1999. Mr. McWilliams served as an Executive Vice
President of CNL Financial Group, Inc. from the time he joined the company in
April 1997 until September 1999. Mr. McWilliams served as President of CNL Fund
Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the
business of real estate financing, from April 1997 until the acquisition of such
entities by wholly owned subsidiaries of CNL-RP in September 1999. From
September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch
& Co. The majority of his career at Merrill Lynch & Co. was in the Investment
Banking division where he served as a Managing Director. Mr. McWilliams received
a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master
of Business Administration degree with a concentration in finance from the
University of Chicago in 1983.
Steven D. Shackelford, age 40. Mr. Shackelford was promoted to
Executive Vice President and Chief Operating Officer of CNL-RP in September
2003. Mr. Shackelford has also served as Chief Financial Officer since January
1997. He served as Senior Vice President of CNL-RP from January 1997 through
July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has
also served as Secretary and Treasurer of CNL-RP since September 1999. He also
served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996
to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse LLP where he was responsible
for advising foreign clients seeking to raise capital and a public listing in
the United States. From August 1992 to March 1995, he was a manager in the
Paris, France office of Price Waterhouse, serving several multi-national
clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor
of Arts degree in Accounting, with honors, and a Master of Business
Administration degree from Florida State University and is a certified public
accountant.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it
was formed in July 2003 to provide strategic advisory services to the General
Partners. He has served in various consulting capacities to CNL Hospitality Corp
and other CNL affiliates since January 2003. Since November 2001 he has been an
independent consultant working for a variety of operating and investment
companies in the hospitality industry. Until October 2001, Mr. Arasi was
President & Chief Executive Officer, and a member of the Board of Directors of
Lodgian, Inc., a New York Stock Exchange traded company, one of the largest
independent hotel owner/operators in North America, with hotel properties under
most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by
Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997
through November 2000, Mr. Arasi was a member of the Management Committee and
held several top operating positions with Bass Hotels & Resorts, one of the
leading international owners, operators and franchisors of hotels, most recently
serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly
President of Tishman Hotel Corporation, Vice President of Salomon Brothers,
Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton,
Westin and HVS International. Mr. Arasi graduated from Cornell University in
January 1981, where he received a Bachelor's degree in Hotel and Restaurant
Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the
officers of the corporate General Partner, and persons who own more than ten
percent of a registered class of the Partnership's equity securities
(collectively, the "Reporting Persons"), to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are
required by SEC regulation to furnish the Partnership with copies of all Forms
3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such
forms the Partnership has received and written representations from certain
Reporting Persons that they were not required to file Forms 5 for the last
fiscal year, the General Partners believe that all Reporting Persons complied
with all filing requirements applicable to them with respect to transactions
during fiscal 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not
adopted a code of business conduct applicable exclusively to the Partnership.
However, employees of the General Partners or their affiliates, including the
individual General Partners, are bound by the Code of Business Conduct adopted
November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor
are bound by the similar Code of Business Conduct adopted by CNL Restaurant
Properties, Inc. Each of these codes of business conduct will be made available
to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does
not have an audit committee that is responsible for supervising the
Partnership's relationship with its independent auditors. For the Partnership,
this role is performed by the General Partners. Based on his previous service as
the principal financial officer of companies with businesses similar to that of
the Partnership, Robert A. Bourne, one of the General Partners, has the
requisite experience to be considered an "audit committee financial expert" as
defined in the rules under the Securities Exchange Act of 1934, if the
Partnership had an audit committee. As a General Partner, Mr. Bourne is not
independent of the Partnership.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth, as of March 12, 2004, the beneficial
ownership interest of each person known to the Registrant to be a beneficial
owner of more than five percent of the Units.
Name and Address of Number of Percent
Title of Class Beneficial Owner Units of Class
----------------------------------- ---------------------------------- -------------- -------------
Units of Limited Partnership Public School Retirement 210,290 5.26
Interest System of the City of St. Louis
1 Firstar Plaza
Ste. 2510
St. Louis, MO 63101
The following table sets forth, as of March 12, 2004, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
--------
100%
========
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 2003, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- ---------------------------------- -------------------------------------- ------------------------------
Reimbursement to affiliates for Operating expenses are reimbursed at Accounting and administra-
operating expenses the lower of cost or 90% of the tive services: $145,513
prevailing rate at which comparable
services could have been obtained in
the same geographic area.
Affiliates of the General Partners
from time to time incur certain
operating expenses on behalf of the
Partnership for which the
Partnership reimburses the
affiliates without interest.
Annual, management fee to One percent of the sum of gross $40,137
affiliates revenues from Properties wholly
owned by the Partnership plus the
Partnership's allocable share gross
revenues of joint ventures in which the
Partnership is co-venturer. The
management fee, which will not exceed
competitive fees for comparable fees for
comparable services in the same
geographic area, may or may not be taken,
in whole or in part as to any year, in
the sole discretion of affiliates.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
Deferred, subordinated real A deferred, subordinated real estate $-0-
estate disposition fee payable disposition fee, payable upon sale
to affiliates of one or more Properties, in an
amount equal to the lesser of (i)
one-half of a competitive real estate
commission, or (ii) three percent of the
sales price of such Property or
Properties. Payment of such fee shall be
made only if affiliates of the General
Partners provide a substantial amount of
services in connection with the sale of a
Property or Properties and shall be
subordinated to certain minimum returns
to the Limited Partners. However, if the
net sales are reinvested in a replacement
Property, no such real estate disposition
fee will be incurred until such
replacement Property is sold and the net
sales proceeds are distributed.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to one percent of Partnership
Partnership net cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to five percent of Partnership
Partnership net sales proceeds distributions of such net sales
from a sale or sales not in proceeds, subordinated to certain
liquidation of the Partnership minimum returns to the Limited
Partners.
Amount Incurred
Type of Compensation For the Year
And Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
General Partners' share of Distributions of net sales proceeds $-0-
Partnership net sales proceeds from a sale or sales of
from a sale or sales in substantially all of the
liquidation of the Partnership Partnership's assets will be
distributed in the following order or
priority: (i) first, to pay all debts and
liabilities of the Partnership and to
establish reserves; (ii) second, to
Partners with positive capital account
balances, determined after the allocation
of net income, net loss, gain and loss,
in proportion to such balances, up to
amounts sufficient to reduce such
balances to zero; and (iii) thereafter,
95% to the Limited Partners and 5% to the
General Partners.
During 2001, Phoenix Restaurant Group, Inc. ("PRG") filed for
bankruptcy and neither rejected, nor affirmed the three leases it had with the
Partnership, including a lease held with an affiliate of the general partners,
as tenants-in-common. The Partnership owns a 72.58% interest in the tenancy in
common. During 2002, the bankruptcy court assigned the leases relating to the
properties in Avon, Colorado; and Abilene and Corpus Christi, Texas to
CherryDen, LLC; SWAC, LLC; and RAI, LLC, respectively. CherryDen, LLC and RAI,
LLC are affiliates of the general partners. All other lease terms remained the
same. In connection with the lease for the property in Avon, Colorado, the
Partnership recognized rental revenues of approximately $176,000 and $110,900
during the years ended December 31, 2003 and 2002, respectively. The tenancy in
common recognized rental revenues of approximately $190,600 and $127,800
relating to the property in Corpus Christi, Texas during the years ended
December 31, 2003 and 2002, respectively. The Partnership recognized its
pro-rata share of these amounts in equity in earnings of unconsolidated joint
ventures in the accompanying financial statements.
Item 14. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the
Partnership for the audit and other services provided by the Partnership's
independent certified public accountants, PricewaterhouseCoopers LLP, for the
years ended December 31:
2003 2002
--------------------- ------------------
Audit Fees (1) $ 14,358 $ 12,000
Tax Fees (2) 7,432 6,948
--------------------- ------------------
Total $ 21,790 $ 18,948
===================== ==================
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002
consisted of the examination of the financial statements of the
Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the
General Partners. Due to its organization as a limited partnership, the
Partnership does not have an audit committee
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2003 and 2002
Statements of Income for the years ended December 31, 2003, 2002, and
2001
Statements of Partners' Capital for the years ended December 31,
2003, 2002, and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002,
and 2001
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for December 31,
2003, 2002, and 2001
Schedule III - Real Estate and Accumulated Depreciation at December
31, 2003
Notes to Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2003
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XI, Ltd. (Included as Exhibit 3.2 to
Registration Statement No. 33-43278 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XI, Ltd. (Included as Exhibit 3.2 to
Registration Statement No. 33-43278 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XI, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on April
15, 1993, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund XI, Ltd. and
CNL Investment Company (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on
April 15, 1993, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as
Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors,
Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to
Form 10-Q filed with the Securities and Exchange Commission
on August 14, 2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP
to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to
Form 10-Q filed with the Securities and Exchange Commission
on August 14, 2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period October 1,
2003 through December 31, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March, 2004.
CNL INCOME FUND XI, LTD.
By:CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
-----------------------------------
ROBERT A. BOURNE, President
By:ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
-----------------------------------
ROBERT A. BOURNE
By:JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
-----------------------------------
JAMES M. SENEFF, JR.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Robert A. Bourne President, Treasurer and Director March 23, 2004
- ------------------------------------ (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 23, 2004
- ------------------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001
Additions Deductions
----------------------------- ------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning of Costs and Other Uncollec- be Col- at End
Year Description Year Expenses Accounts tible lectible of Year
- ---------- ----------------- ---------------- ------------- -------------- ------------- ------------- ------------
2001 Allowance for
doubtful
accounts (a) $ 199,946 $ 105,501 $ 256,516 (b) $ 62,085 (c) $ 12,751 $ 487,127
================ ============= ============== ============= ============= ============
2002 Allowance for
doubtful
accounts (a) $ 487,127 $ 15,444 $ 19,025 (b) $ 300,072 (c) $ 198,328 $ 23,196
================ ============= ============== ============= ============= ============
2003 Allowance for
doubtful
accounts (a) $ 23,196 $ 18,050 $ 181,723 (b) $ 59,694 (c) $ 31,657 $ 131,618
================ ============= ============== ============= ============= ============
(a) Deducted from receivables and accrued rental income on the balance
sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Costs Capitalized
Subsequent To Net Cost Basis at Which
Initial Cost Acquisition Carried at Close of Period (c)
-------------------------- --------------------- ---------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- ------------ ------------ ------------ ------- --------- ------------ --------
Properties the Partnership
has Invested in Under
Operating Leases:
Burger King Restaurants:
Amesbury, Massachusetts - $359,458 $791,913 - - $359,458 $791,913 $1,151,371
Bloomfield, Connecticut - 266,685 555,656 - - 266,685 555,656 822,341
Gonzales, Louisiana - 362,073 575,454 - - 362,073 575,454 937,527
Denver, Colorado - 438,756 - - - 438,756 (f) 438,756
Dayton, Ohio - 472,964 441,860 - - 472,964 441,860 914,824
Lawrence, Kansas - 321,505 411,353 - - 321,505 411,353 732,858
Roswell, New Mexico (j) - 205,379 461,219 - - 237,932 461,219 699,151
Danbury, Connecticut (h) - 220,496 498,434 - - 220,496 498,434 718,930
Yelm, Washington (k) - 337,806 655,935 - - 337,806 655,935 993,741
Casa Del Rio Restaurant:
Wadsworth, Ohio - 187,368 - - - 187,368 (f) 187,368
Denny's Restaurants:
Orlando, Florida - 627,065 - - - 627,065 (f) 627,065
Avon, Colorado (l) - 755,815 - 569,297 - 587,825 479,369 1,067,194
Ocean Springs, Mississippi - 303,267 - - - 303,267 (f) 303,267
Golden Corral Buffet
and Grill Restaurants:
McAllen, Texas - 649,484 947,085 - - 649,484 947,085 1,596,569
Midwest City, Oklahoma - 506,420 975,640 - - 506,420 975,640 1,482,060
Oklahoma City, Oklahoma- 650,655 975,170 - - 650,655 975,170 1,625,825
Hardee's Restaurants:
Dothan, Alabama - 275,791 - - - 275,791 (f) 275,791
North Augusta, South Caroli-a 201,056 - - - 201,056 (f) 201,056
Jack in the Box Restaurants:
Houston, Texas - 475,618 447,374 - - 475,618 447,374 922,992
Houston, Texas - 350,115 607,530 - - 350,115 607,530 957,645
Houston, Texas - 362,591 582,149 - - 362,591 582,149 944,740
Kingswood, Texas - 373,894 544,539 - - 373,894 544,539 918,433
Rockwall, Texas - 348,497 652,932 - - 348,497 652,932 1,001,429
Antelope, California - 500,623 524,823 - - 500,623 524,823 1,025,446
Show Low, Arizona - 185,602 503,343 - - 185,602 503,343 688,945
KFC Restaurant:
Deming, New Mexico - 150,455 - - - 150,455 (f) 150,455
Taco Cabana Restaurant:
Houston, Texas (i) - 843,699 533,093 - - 843,699 533,093 1,376,792
------------ ------------ ------------ ------- ------------ ------------ -----------
$10,733,137 $11,685,502 $569,297 - $10,597,700 $12,164,871 $22,762,571
============ ============ ============ ======= ============ ============ ===========
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Burger King Restaurant:
Denver, Colorado - - - $403,692 - - (f) (
Casa Del Rio Restaurant:
Wadsworth, Ohio - - 264,861 - - - (f) (
Denny's Restaurants:
Orlando, Florida - - - 696,187 - - (f) (
Kent, Ohio - 101,488 421,645 - - (f) (f) (
Ocean Springs, Mississippi - - 324,225 - - - (f) (
Hardee's Restaurants:
Dothan, Alabama - - 407,368 - - - (f) (
North Augusta, South Caroli-a - 457,712 - - - (f) (
Old Fort, North Carolina - 100,413 457,747 - - (f) (f) (
KFC Restaurant:
Deming, New Mexico - - - 389,032 - - (f) (
Other:
Laurens, South Carolina (g)- 170,905 537,361 - - (f) (f) (
------------ ------------ ------------ ------- ------------
$372,806 $2,870,919 $1,488,911 - -
============ ============ ============ ======= ============
Life on Which
Depreciation
Date Latest Income
Accumulated of Con- Date Statement
Depreciation struction Acquired Computed
----------- ------- ------- ----------
$303,823 1982 06/92 (b)
213,173 1990 06/92 (b)
220,769 1989 06/92 (b)
- 1992 06/92 (d)
165,804 1987 09/92 (b)
154,365 1982 09/92 (b)
173,071 1986 09/92 (b)
110,231 1983 09/98 (b)
16,656 1997 01/99 (k)
- 1992 09/92 (d)
- 1992 06/92 (d)
197,555 1993 09/92 (b)
- 1992 09/92 (d)
364,306 1992 06/92 (b)
375,286 1992 06/92 (b)
377,869 1992 05/92 (b)
- 1992 09/92 (d)
- 1992 09/92 (d)
168,045 1992 09/92 (b)
228,203 1992 09/92 (b)
218,664 1992 09/92 (b)
204,543 1992 09/92 (b)
245,255 1992 09/92 (b)
197,134 1992 09/92 (b)
189,062 1992 09/92 (b)
- 1993 09/92 (d)
37,873 1998 12/01 (b)
- - -----------
$4,161,687
= ===========
f) (d) 1992 06/92 (d)
f) (d) 1992 09/92 (d)
f) (d) 1992 06/92 (d)
f) (e) 1987 07/92 (e)
f) (d) 1992 09/92 (d)
f) (d) 1992 09/92 (d)
f) (d) 1992 09/92 (d)
f) (e) 1992 09/92 (e)
f) (d) 1993 09/92 (d)
f) (e) 1992 09/92 (e)
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation are summarized
below. The balances in 2003, 2002, and 2001 have been adjusted to
reflect the reclassification of properties accounted for as
discontinued operations.
Accumulated
Cost Depreciation
---------------- -------------------
Properties the Partnership has Invested
in Under Operating Leases:
Balance, December 31, 2000 $ 22,091,058 $ 3,197,695
Acquisition 1,376,791 --
Disposition (1,135,848 ) (220,663 )
Provision for write-down of assets (l) (257,918 ) --
Depreciation expense -- 394,395
---------------- -----------------
Balance, December 31, 2001 22,074,083 3,371,427
Acquisition (j) 32,553 --
Depreciation -- 386,796
---------------- -----------------
Balance, December 31, 2002 22,106,636 3,758,223
Transfer from direct financing lease (k) 655,935 --
Depreciation expense -- 403,464
---------------- -----------------
Balance, December 31, 2003 $ 22,762,571 $ 4,161,687
================ =================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2003, the aggregate cost of the Partnership's wholly
owned Properties and the Properties owned by its consolidated joint
ventures was $30,421,966 for federal income tax purposes. All of the
leases are treated as operating leases for federal income tax purposes.
(d) The portion of the lease relating to the building has been recorded as
a direct financing lease. The cost of the building has been included in
net investment in direct financing leases; therefore, depreciation is
not applicable.
(e) The lease for the land and building has been recorded as a direct
financing lease. The cost of the land and building has been included in
net investment in direct financing leases; therefore, depreciation is
not applicable.
(f) Certain components of the lease relating to land and building have been
recorded as a direct financing lease. Accordingly, costs relating to
these components of this lease are not shown.
(g) The restaurant on this Property was converted from a Denny's restaurant
to a Hardee's restaurant during 1994. During 1999, the lease was
assigned to a new tenant and the Property was renovated to a Gooney
Birds Sports Grill and Bar.
(h) This Property was exchanged for a Burger King Property previously owned
and located in Columbus, Ohio during 1998.
(i) During the year ended December 31, 2001, the Partnership purchased a
real estate Property from 2002-A, LP, an affiliate of the General
Partners, for an aggregate cost of approximately $1,376,800.
(j) In August 2002, the Partnership received a parcel of land adjacent to
its Property in Roswell, New Mexico for payment of approximately
$32,500 of past due rents. The parcel of land is developed as a parking
lot which is contiguous to the parking lot of the Partnership's
Property.
(k) During 2003, the lease for the Property in Yelm, Washington was
terminated and the Partnership subsequently entered into a new lease
with a new tenant, resulting in the reclassification of the assets to
real estate properties with operating leases. The assets were recorded
at their net carrying value and the building is being depreciated over
its estimated remaining life of approximately 26 years.
(l) For financial reporting purposes, the undepreciated cost of the
Property in Avon, Colorado was written down to its estimated fair value
due to an impairment in value. The Partnership recognized the
impairment by recording a provision for write-down of assets of
approximately $257,900 at December 31, 2001. The impairment represented
the difference between the Property's net carrying value and its
estimated fair value.
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
3.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XI, Ltd. (Included as Exhibit 3.2 to
Registration Statement No. 33-43278 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL
Income Fund XI, Ltd. (Included Exhibit 3.2 to Registration
Statement 33-43278 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XI, Ltd. (Included as Exhibit 4.2 to Form 10-K
filed with the Securities and Exchange Commission on April
15, 1993, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund XI, Ltd. and
CNL Investment Company (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on
April 15, 1993, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as
Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated
herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors,
Inc. to CNL APF Partners, LP (Included as Exhibit 10.4 to
Form 10-Q filed with the Securities and Exchange Commission
on August 14, 2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP
to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to
Form 10-Q filed with the Securities and Exchange Commission
on August 14, 2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2